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Few disciplines within hospitality technology are as complex as payments. And there may be none where hospitality is further behind the rest of the business world. Compared to e-commerce, restaurants, retail, and even Online Travel Agencies (OTAs), payments in hotels are perhaps 20 years behind. Poor payment handling is an important reason why many consumers use OTAs rather than booking direct.

Payments are too big a subject matter for me to cover comprehensively in one column. Today I will focus specifically on approaches to payments that can significantly cut costs for hotels – both directly and through their impact on customer behavior (such as where they book). Hotels are leaving enormous amounts of money on the table by using legacy, pre-ecommerce technologies and business practices around payments. But solutions that have existed in retail, ecommerce, and other industries for decades are finally starting to become available in hospitality. A few are simple no-brainers, while others require a significant but long overdue rethinking of the payment process.

I do not want to ignore other payment innovations, such as ones that improve the customer experience, that provide a more comprehensive view of the customer, or that generate ancillary revenue by selling third-party products along with hotels in a shopping-cart format. These are important and may well be topics for a future column, but not for today.

There are literally hundreds of vendors operating in the hospitality payment space, far too many for me to talk with them all. But I did get the benefit of spending time and getting first-hand perspectives from experts at Adyen, Kount, Selfbook, Sertifi, Shift4, Stripe, Worldpay, and XanderPay - a combination of industry leaders and more specialized companies to which some of the leaders pointed me. Each of these companies specializes in serving hotels with payment-related products, and I thank them all for sharing their thoughts on best practices and the evolution of payments in hotels.

I also got great information on preventing and managing payment fraud from Maggie Bazemore, Knowledge Management Director at Mr. & Mrs. Smith (part of the Hyatt family). Her company is a travel club for hotel lovers that acts as an online booking agency. Payment fraud hits online agencies hard, since they only take a small percentage of the booking revenue but can be responsible for 100% of any fraudulent charges. Given the direction that many hotel brands are now considering for payments (discussed below), they will have new exposures to payment fraud that are more like those faced by online agencies, so her insights are invaluable.

Payments and Financial Waste

The current payments environment results in a lot of money wasted by hotels. While the specifics will vary from hotel to hotel, my rough calculations suggest that the average hotel can reduce payment processing costs and OTA commission costs by about 0.8% to 2% of total room revenue. That drops straight to the pretax profit line, yielding a much larger impact on profitability. Several sources of cost reduction are available, but which ones will be significant for a particular hotel will depend on factors like its location, business mix (notably geographic source markets and direct vs. brand vs. OTA), brand affiliation, and customer preferences. Sources of savings include:

Loss of Direct Bookings to OTAs. While credit cards are the most frequently used method of payment in North America, they are far less common in many parts of the world. Guests from many parts of Asia, Europe, and other world regions either may not have credit or debit cards affiliated with the major international card brands at all, or they may carry one for travel but prefer to use other options that are the common or even dominant payment instrument in their home countries.

In many parts of Europe and Asia, bank-to-bank GIRO transfers (similar to Venmo or Zelle in the U.S.) are common payment methods; for almost all Chinese consumers, payments are made by one of two common mobile apps (WeChatPay and AliPay) or, if a credit card is used, by China Union Pay. Very few hotel booking sites in North America support any of these methods – or any of at least 100 other national and regional payment platforms that are common in different countries. The major OTAs, on the other hand, generally support the common payment methods used in each country where they operate.

For example, if you use Booking.com from The Netherlands to book a US hotel, you have the choice of paying with major international credit cards (Visa, MasterCard, American Express, Discover, and Diners Club), China Union Pay, or JCB. You can pay by PayPal if you prefer, or you can pay with iDEAL or Klarna, which are common in the Netherlands and some other parts of Europe. Depending on your device you may also get the option to use Apple Pay or Google Pay. If you book from a different country, you will see different choices. Meanwhile, Hilton, Hyatt, IHG, Marriott, and most other brand websites support only the major international credit cards no matter what your nationality.

Because of this, an overseas guest that wants to book a major branded hotel in the U.S. using their preferred payment method typically hits a brick wall when they reach the payment page. At that point many will either choose a different hotel or go to an OTA site that supports their preferred payment method (or both). The hotel loses a direct booking, either to a competitor or, at best, to a high-cost commissionable channel.

Many OTAs support other payment enhancements that can also lead to loss of direct business, including buy-now, pay-later; direct currency conversion (where the payment is converted to the customer’s home currency at the time of booking to guarantee the exchange rate), and options for traveling parties to split payments. A few hotel websites support some of these capabilities, but they are few and far between.

Virtual Credit Cards. An enormous amount of unnecessary cost is tied up in the use of virtual credit cards (VCCs). If you are not familiar with VCCs, they are one-time-use card numbers, issued under one of the common international card schemes. They are commonly used when payment is submitted to a hotel by a third party, such as an OTA or travel management company. They are comparatively secure, since there is no physical card, they can only be charged by the specific hotel, are value limited to an amount appropriate for the stay, and can be processed only during a certain time window around the stay.

While there are use cases where VCCs make sense, the principal uses in hotels today are (a) for OTAs to be able to transfer funds to a hotel to pay for a single OTA booking; and (b) for certain B2B transactions, such as settlement of corporate accounts. These payments can be handled much less expensively using some form of bank-to-bank transfer and clearing house, such as from XanderPay.

Virtual credit cards result in unnecessary costs in two primary ways.

• They carry significantly higher interchange rates, which often subsidize significant kickbacks to the OTAs that are usually invisible to hotels.
• When an OTA pays with a VCC issued by a bank in a different country from the hotel, an international interchange fee (around 1.2%) may also apply.

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Inefficient and Expensive Payment Processing. The hotel industry handles almost all payment processing on-property, meaning that it gets few efficiencies of scale. Processing fees are higher, and supporting technology must often be purchased for each location rather than once for a high-volume central location. Management of payments at the hotel is often split among multiple people and is nobody’s primary job; and as complex as it is, there is no time for anyone to learn. Few fraud and dispute management technologies are used because the cost and complexity are only justifiable at higher volumes. As a result, chargebacks are higher and the chargeback recovery rate is lower.

Not Accepting Low-Cost Payment Instruments. Credit cards are convenient and in many parts of the world essential, but they are also comparatively expensive to process, particularly in North America. Despite this, most hotel sites accept credit cards but not the lower-cost alternative payment methods. Customers from many countries often prefer these alternatives. But because very few hotel brands process credit cards centrally, they can only accept payment instruments that every one of their hotels can present to their different processors or acquirers.

Obviously, it makes no sense for a roadside motel in the U.S. to maintain merchant accounts with Dutch payment methods that might only be used once or twice a year at that hotel, so the only common denominator across all hotels in a brand is the main international payment card schemes that every hotel accepts. While the brand.com site could theoretically support collection of many alternative payment methods and pass the information on to its properties, those properties would lack the ability to process them.

Unnecessary Trans-Border Interchange Fees. Any time a transaction is converted from one currency to another, fees get added, generally in the range of 0.5% to 3%. With the right service platforms, much of this can be avoided. Some payment facilitators have the ability to “route” the transaction to an affiliate in the country where the transaction will be treated as domestic. Some also provide a clearing house structure to reduce the need to use the banking network to translate each transaction separately; only the much smaller net payout amounts need to go through the currency exchange process. Trans-border fees can add up and can even apply when the customer and hotel are in the same country if the booking agent (e.g. OTA) is elsewhere.

Lost Opportunity for Payment Surcharges and Incentives to Use Less Expensive Payment Methods. Surcharges for credit card transactions are both common and culturally acceptable in many countries in retail, restaurants, and ecommerce. While there are concerns about assessing these fees in countries where consumers are not accustomed to them and where competitors are not charging them, a few hotels are starting to use them. This makes sense where the preferred payment method is lower cost: by using that method, the guest pays no surcharge, gets to use their preferred payment instrument, and the hotel’s settlement costs are lower.

Barriers to Centralizing Payments at the Brand Level

If we were designing a hotel payment approach from scratch, there is little doubt it would be built at the brand level rather than for each property. Replacing the existing ecosystem, however, is very challenging. Brands want to avoid both balance-sheet liabilities and the assumption of chargeback risks that they worry they would incur if they process cards.

Furthermore, existing brands would generally need to get the buy-in of their hotel owners to centralize payments. This would require a funding mechanism (since brands would incur costs currently borne by properties) and contractual servicing arrangements. Given frequent distrust between owners and brands, convincing owners that a program is in their interest is not always easy. Additionally, existing relationships between hotel owners and their payment providers would need to be terminated, which can take time if longer-term contracts are in place (often with multiple providers for processors, gateways, and payment devices).

Several credible vendors are rolling out capabilities to help brands address this challenge, and I expect to see some movement in the not-too-distant future. Most of the products are not yet formally announced, so I will not name the companies here, but encourage you to speak with the vendors I have mentioned above if this is of interest. There are several key issues to consider.

• Different processors and payment facilitators can help hotels accept various forms of payment on the booking site. Each hotel and brand can decide which ones matter for their customer base. The vendors can help you if you have the geographic breakdown of your source markets.

• The customer journey (and payment journey) may start at the time of booking, but usually continues at the hotel. In the most frictionless implementation, the payment method would be collected (and possibly charged) up front. It would then follow the guest to the hotel, where it can be used for any balance due, incidental charges, or no-show guarantees.

• However, not all payment methods support incremental authorizations and charges the way that the major payment card schemes do, and not all reservations are made centrally. It will still therefore be necessary for the hotel to collect payments directly in some cases. Ideally this would be done in the same payment vendor ecosystem as used for brand.com, but further evolution of their capabilities may be needed to enable this.

• Some vendors will support distribution of centrally processed payments to individual hotels via direct banking deposits. If they do not, then the brand will need to do this itself.

• With some solutions, chargebacks can be sent to the property and handled as they are today; with others, they are sent to the brand to resolve.  The latter approach will require staff and automation tools, and may be challenging for brands that lack standardized property management systems, accessible at the brand level, for researching disputes. But it should be possible for most major brands.

• If brands want to keep advance payments off their own balance sheets, they can, but that may require certain language in the services agreement with properties that designates the brand as a booking agent for the property, not a principal. This is similar to how OTAs work. Payment schemes treat OTAs, as booking agents, differently than brick-and-mortar merchants like hotels; a brand could be treated as a booking agent if it is only processing on behalf of the end provider of the service.

• Smaller brands may be able to replace their booking engine with one that supports the desired payment methods. Larger brands may find a solution that can replace only the payment page, but integrating it into a custom website can be a significant challenge.

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Reducing the Risk and Cost of Fraud

The cost of chargebacks is an integral part of payment processing, especially with the major card brands. An additional reason to support alternative payment methods is that many of them do not have a similar mechanism, or it is available to consumers only in much more limited situations.

Several experts I spoke with said that hotels “assume” they are getting the maximum possible fraud protection from their vendors. But many do not, because it requires signing on to specific programs and they do not realize they need to do so. This is especially the case where (as with most hotels) payment decisions are made at the property level rather than at the corporate brand. Many (but not all) fraud prevention options are also impractical if the total volume of fraud incidents is low, as is often the case for individual hotels.

Biometrics. Some payment methods have built-in fraud controls. Apple Pay and Google Pay, for example, can use biometric or digital authentication to ensure that only the cardholder can authorize a payment; this makes it much harder for them to later dispute it. Yet despite this (and the skyrocketing use of such digital payments by consumers), few hotels accept them at all.

Risk Scoring. Several vendors examine transactions in real time and assess the probability that they are fraudulent. While the specific factors vary, they often include things like the advance booking window (same or next-day bookings are more likely to be fraudulent), whether the customer is a first-timer vs. a regular, the customer’s country (where they live, where their IP address is located, and whether those match), and similar factors.

Some hotels and vendors do their own scoring, while commercial solutions like Kount and Stripe Radar are able to correlate fraud factors (and even in some cases specific fraudulent cards) based on data collected from millions of cardholders, past “normal” usage patterns of individual cardholders, and other factors not available to hotels. Some hotels apply their own crude scoring first, and then send only the higher-risk transactions to a paid service.

3D Secure. One key capability that instantly reduces the cost of fraud is 3D Secure, which is now universally used in European ecommerce and is becoming increasingly common with U.S. processors and issuers. When a merchant uses 3D Secure, the liability for fraudulent charges is shifted from the merchant to the issuing bank.

From a process standpoint, when a card is presented in an ecommerce transaction, the merchant has the option of invoking a 3D Secure challenge from the cardholder’s issuing bank. The bank pops up a window on the merchant’s page, and the cardholder must take an action, such as entering a code sent by text message or authorizing the transaction through their bank’s mobile app. This provides the equivalent of biometric proof that the cardholder authorized the charge, so the bank will accept liability in the event of fraud.

3D Secure is not frictionless, however; it adds a few steps to the payment process. Some of the experts I spoke with estimate that 10% of challenged payments result in shopping cart abandonment. Most of these do not represent likely fraud, but rather circumstance, such as a phone or app not being handy. Some customers probably return later to complete the booking, but others may be lost.

For this reason, most merchants use 3D Secure only (a) for transactions where local regulations require strong authentication; and (b) for transactions that have high risk scores. 3D Secure is now available from virtually all US card issuers at a minimal cost per transaction. Each hotel can do the math based on the number and cost of chargebacks they have and the risk scores associated with transactions that are ultimately determined to be fraudulent; most will likely find it appropriate to issue challenges only for that small percentage of charges that are most likely to result in avoidable chargebacks.

While 3D Secure is widely available, most hotels do not use it because it only applies to payments made via a website or mobile app. Brand.com sites generally do not process the payment but rather collect the payment information and forward it to hotels for processing. But by the time the payment information gets to the hotel, the cardholder is no longer online and cannot react to any challenge. If brands processed charges centrally (as OTAs do for prepaid bookings), then 3D Secure would make more sense for them.

Third Party Charges. When the cardholder is someone other than the guest, the hotel can have to prove (in the event of a chargeback) that the cardholder authorized it. Solutions like Sertifi can securely collect credit card information from third parties. Proving that the third party personally authorized the charge can be handled either by combining it with 3D Secure, a digitally signed agreement (which Sertifi can also support), or by other means that the issuing bank is willing to accept.

Many payment facilitators and processors also support payment by link, where a link or QR code is provided to the cardholder. The link takes them to a secure payment landing page run by the vendor, and includes embedded information identifying the transaction to which it should be applied.

Conclusion

Payments represent one of the most archaic examples of technology used in hotels. Today’s most common infrastructure, particularly within branded hotels, is inconvenient and high-friction for the guest, high cost for hotel owners, and thwarts brand efforts to garner direct bookings and loyalty. I can think of no better example where technology can provide significant wins for guests, hotel owners, and hotel brands.

The infrastructure to fix the problem is now largely in place. It is not fully mature, and it requires significant process change, contractual modifications, and enhancements to existing systems to be practical for most (especially multinational) brands. On the other hand, independents and smaller, national or regional brands may be able to take advantage of these capabilities today to improve financial returns and reduce customer friction.

What other opportunities and challenges do you see in payments? Follow me on LinkedIn and join the conversation – I post links to each article soon after publication, and you can add your comments or questions there. And to get my column in your inbox most every second Friday, you can subscribe to the Hotel Online newsletter here.

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